A new report by Morningstar director of equity research Johannes Faul pinpoints the big trends impacting the retail sector, including the challenges and opportunities for investors.  

We take a look at at five charts from Faul’s report to better understand the outlook for the retailers.

Premium subscribers can get full access to the report here.

1. High level of savings to support spending (for now)

Despite the gloom of rising inflation and interest rates, consumers have stashed enough cash to keep spending through these challenged times.

Faul estimated that an additional savings of $250 billion was garnered during March 2020 and September 2022.

However, he also expects total retail spending to grow by only 2% in fiscal 2022 with consumers resetting their priorities and shifting spend back towards services from goods.

Savings rate quarterly

2. Margin constrains for supermarkets despite higher grocery prices

Morningstar’s shopping basket indicator suggests inflation is sitting at peak levels in December.

While higher food prices will support first-half 2023 sales growth for the two supermarket giants, Faul believes that the market could be overestimating the positive impact of food price inflation on supermarket earnings.

He believes that the margins for Woolworths (WOW) and Coles (COL) will be impacted by higher costs in particular higher wages.

Quarterly food price

3. Boom in home improvement spending to ease

The days of spending on items such as lounges, coffee machines and smart phones are expected to ease.

Sale volumes in furniture, home appliances and consumer electronics were high in the September quarter, however, Faul predicts these volumes to flatten in fiscal 2023.

The businesses most exposed to this outlook are JB Hi Fi (JBH), Harvey Norman (HVN), Wesfarmers (WES) and Metcash (MTS).

household goods sales

4. Dining out is back

Following two years of lockdowns amid the health pandemic, dining out has rebounded as workers return to offices, food courts and cafes. It comes at a time, however, of rising costs and interest rates.

Faul expects Australians to be prudent with their spending and here, demand could be stronger for cheaper dining out alternatives.

Faul believes Domino’s Pizza (DMP) is well positioned. The business, however, must strike a balance between keeping its market share and profit margins from inflation.

dining out sales

5. Kogan well-placed in shift to e-commerce

Australian e-commerce has already started normalising with online penetration now standing at 16% in October 2022, down from peak levels of 24% in September 2021.

Faul believes that as an online pure play, Kogan will “lap exceptionally strong Covid-19-induced sales sooner than its omnichannel peers”. In fact, he expects Kogan sales to reignite over the remainder of fiscal 2023.  

“We expect it to successfully retain its share in the fast-growing Australian discretionary online retailing channel at around 2.5%.

monthly sales growth